Levered Free Cash Flow (LFCF)
Definition
Levered free cash flow is the cash flow available to equity holders only, after debt holders have been serviced. A common formulation: LFCF = net income + D&A − capex − increase in net working capital − mandatory debt repayments (some definitions also add net new borrowings); a quick proxy is cash flow from operations minus capex.
Because it is after interest (and often after scheduled principal payments), LFCF depends on capital structure. Discounting LFCF at the cost of equity yields equity value directly.
Levered DCFs are less common in banking practice than unlevered DCFs because changing leverage over the forecast makes the cash flows and the discount rate inconsistent unless both are updated together.
Why interviewers ask
The pairing rule is the exam: levered FCF goes with cost of equity and gives equity value; using WACC on levered cash flows is a classic fail. Interviewers also ask why the unlevered DCF is preferred (capital-structure neutrality, comparability, cleaner terminal value).
Related terms
Interviews don't test definitions — they test recall under pressure.
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